Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Monday, 30 September 2013

PETALING JAYA: Maybank Investment Bank Research has downgraded the rubber gloves sector from “overweight” to “neutral” as the valuations of the stocks are fairly reflective of fundamentals now.

Analyst Lee Yen Ling said price-to-earnings (PER) valuations had risen from eight to 16 times end-2012 to 11 to 19 times currently.

“Though new supply (for nitrile gloves) looks aggressive, near-term price competition is likely to be mild, for new capacity will just about match demand, we believe, with the latter expanding by about 20% year-on-year,” she said.

Demand for nitrile glove sales were also driven by a shift in customer preference from latex powder-free to nitrile gloves, she said, adding that margins for nitrile gloves remained higher compared with latex gloves by more than 6 percentage points as a result of higher pricing and lower raw material cost.

Lee pointed out that glove manufacturers usually did not gain or lose significantly on foreign exchange volatility as most of them bought forward contracts which expired in two to three months to sell US dollars when they delivered the products as a way to hedge their US-denominated receivables.

She added that the recent fuel price hike, which led to higher transportation costs for the companies, had insignificant impact on them as transportation accounted for only 2% to 3% of total costs, thus they were not adjusting glove prices.

She has given a higher target price of RM7.60 to the counter as she revised Kossan’s PER upwards to 16 times from 15 times.

Meanwhile, she maintained a “hold” rating on Hartalega Holdings Bhd with the same target price of RM6.71 whereas the target price for Top Glove Corp Bhd was re-rated downwards to RM6.40 with a downgraded “hold” call as weaker latex powder-free glove sales were factored in.

Saturday, 28 September 2013

1.“Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.”It is far more productive for an investor to focus their time and energy on systems which are potentially understandable in a way which might reveal a mispriced asset. George Soros said once: “Unfortunately, the more complex the system, the greater the room for error.” The simplest system on which an investor can focus is an individual company. Trying to understand something as complex as an economy in a way which outperforms the markets is not a wise use of time and is unlikely to happen.

2. “The way you lose money in the stock market is to start off with an economic picture. I also spend fifteen minutes a year on where the stock market is going.” and “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” The media’s objective is to convince you that obsessively following the news cycle is necessary for an investor. In short, the media’s interest is to to convince you to watch their advertising. While you don’t want to be oblivious to the state of the economy, listening to talking head pundits and incessantly following the news cycle is actually counterproductive to profitable investing. Instead, focus on the companies you chose to follow.

3. “The GNP six months out is just malarkey. How is the sneaker industry doing? That’s real economics.” The difference between the predictive power of microeconomics and macroeconomics is “night and day” since with the former vastly fewer assumptions are required and the systems involved are far less complex. The best investors make investing as simple as possible, but no simpler. Lynch is saying he may pay attention to the economics of an industry, but only to understand the economics of the companies he chooses to follow.

4. “To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mind-sets.” It is mathematically certain that you can’t beat the market if you *are* the market. You must find bets that are mispriced, be right about that mispricing and when you do find a mispriced bet, by definition, your view will be contrarian.

5. “A share of a stock is not a lottery ticket. It’s part ownership of a business.” Many people love to gamble since it gives their brain a dopamine hit. They gamble even though it is a tax on people with poor math skills. The right thing for an investor to love is the process of investing, not the bet itself. The right process for an investor is to understand the value generated by the underlying business.

6. “Investing without research is like playing stud poker and never looking at the cards.” You can’t understand a business and its place in an industry without doing research. And in doing research you must find something that the market does not properly discount into the price of the stock or bond. If you spend more time picking out a refrigerator than researching a stock, you should instead be buying a low fee index fund.

7. “Owning stocks is like having children—don’t get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies.” The time in any given day, week etc. is a zero sum game. If you work at a day job and you have a life, only so much time is left to follow stocks and bonds. It is better to be a mile deep in understanding 8-12 companies than an inch deep on many more.

8. “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”Addition, subtraction, multiplication and division is all the math skill you need. Investors should ignore formulas with Greek letters in them.

9. “People seem more comfortable investing in something about which they are entirely ignorant.” Suspending disbelief about an investment is easier for many people for some reason when you know less rather than more, especially if the story is well crafted and told by the promoter. When confronted with someone touting a stock, imagine them holding a megaphone at the circus and then think about what they are saying.

10. “If you can’t convince yourself ‘When I’m down 25 percent, I’m a buyer’ and banish forever the fatal thought ‘When I’m down 25 percent, I’m a seller,’ then you’ll never make a decent profit in stocks.” and “Bargains are the holy grail of the true stock picker. We see the latest correction not as a disaster, but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time.”Who doesn’t like it when something like a hamburger is cheaper to buy? Stocks and bonds are no different. Also, don’t put yourself in a position where you may need to sell at the wrong time.

11. “A market player has 50 percent of his portfolio in cash at the bottom of the market. When the market moves up, he can miss most of the move.”Markets over long period of time inevitably rise. They always have and always will. That is the good news. The bad news is that you can’t “time” when the rise in a market will happen. By trying to “time” the market you can miss a big move up and if you do, your returns will show it.

12. “Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.” Nothing is worse than not being able to care for people you love. Don’t take that risk. And don’t put yourself in a position where you are likely to panic more than usual due to the pain of something normal and inevitable (e.g., a 20% correction in the stock market). Peter Lynch said once: “Small investors tend to be pessimistic and optimistic at precisely the wrong times.”

Friday, 27 September 2013

1. Day trading is prevalent in Taiwan – accounting for more than 20 percent of total trading volume during our sample period.
- Individual investors account for virtually all day trading (over 97 percent).
- Day trading is heavily concentrated. About one percent of individual investors account for half of day
trading and one fourth of total individual investor trading volume.

2. Our analysis of performance indicates day trading is treacherous, but not entirely a fool’s game.
- Heavy day traders, as a group, earn gross profits (before transaction costs).
- Thus, heavy day traders do appear to have a trading advantage over other investors.
- The stocks bought by the most active day traders outperform those sold by 31 basis points per 21 day.
- Unfortunately, the gross profits of heavy day traders are not sufficiently large to cover reasonable estimates of transaction costs.
- Thus, as a group, they lose money.
- In contrast, occasional day traders experience both gross and net losses.
- The stocks bought by occasional day traders actually underperform those sold, even before considering
transaction costs.

3. There is considerable cross-sectional variation in the performance of day traders.
- Over the typical six month horizon, using lower range assumptions regarding transaction costs, less than 20 percent of day traders earn profits net of transaction costs.

4. These results paint a rather dim portrait of day traders. However, we do document a select few are able to consistently earn profits sufficient to cover transaction costs.
- We identify day traders who earn substantial profits over a six-month period and analyze the performance of their subsequent trades.
- These profitable day traders continue to earn stellar returns.
- The average day trader in this group earns a semi-annual income of over $NT 1 million from his day trading activity, though the group’s median income is a more modest $NT 126,000.
- The stocks they buy outperform those that they sell by 62 basis points per day.
- These profits survive transaction costs.
- In other words, there is strong evidence of persistence in the ability of day traders.

Our analysis makes clear the need for comprehensive risk disclosure.
Prospective day traders should be apprised of their likelihood of success:only two out of ten make money; fewer do so consistently.

There are more than 100 million people in the world engaging in trading everyday.If trading do not work, why would there be so many people engaging in this activities everyday over long period of time?

WHY? I am puzzled too.

Most day traders, especially heavy day traders, lose money trading. Why do investors engage in such a wealth reducing activity?

1. One possibility is that investors simply find day trading entertaining.
- Undoubtedly some investors do find day trading entertaining, but can entertainment account for the extent of day trading that we observe?
- Do day traders knowingly and willingly accept such large expected losses for fun?
- For all but the wealthiest investors, this would be a very expensive form of entertainment indeed.

2. Another reason why day trading might entice investors would be if it provided an appealing distribution of returns.
- People often display an attraction to highly skewed investments, such as lotteries, that have negative expected returns but a small probability of a large payoff.
- However, the day trading profits that we document are similar in magnitude to, and far less prevalent than, losses.
- Unlike lottery winners, day traders must succeed on repeated gambles in order to achieve overall success.
- Such repeated gambles do not tend to generate highly skewed distributions.

3. A final potential explanation for the prevalence of day trading is that most day traders are overconfident about their own chances of success.
- Several papers (e.g., Odean (1998, 1999), Barber and Odean (2000, 2001)) argue that overconfidence causes investors to trade more than is in their own best interest.
- Overconfident day traders may simply be bearing losses that they did not anticipate.
- While day traders undoubtedly realize that other day traders lose money, stories of successful day traders may circulate in non-representative proportions, thus giving the impression that success is more frequent that it is.
- Heavy day traders, who earn gross profits but net losses, may not fully consider trading costs when assessing their own ability.
- And, individual day traders may believe themselves more likely to succeed than the average day trader.
- We are unable to explicitly test whether day traders are motivated by overconfidence rather than the desire for entertainment.
- Our opinion is that the average losses incurred by day traders are more than most would willingly accept as the cost of entertainment and that, by and large, day traders must hold unrealistic beliefs about their chances of success.http://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trade%20040330.pdf

Thursday, 26 September 2013

This article explains the classic investment mistakes that, to be successful, you should avoid at all costs.To make money, sometimes it's better to first concentrate on not losing it.

Investing successfully poses many challenges. Here are some of the techniques that can help you to rise to these challenges but first, one of our favourite tools, from mathematician Carl Jacobi.

He was fond of saying, 'invert, always invert' and that's what we're going to do here. Instead of looking at how to make money, we're going to look at great ways to lose it. That way you can aim to minimise your mistakes-a vital part of investing successfully.

Charlie Munger, Warren Buffett's business partner, often refers to the huge mathematical advantages of 'doing nothing' to your portfolio. Let's blindly ignore the very large tax benefits of holding stocks for the long term and just consider the impact of brokerage.

Someone who 'turns over' (buys and sells) all the stocks in their portfolio several times a year is at least a few percent behind the eight ball, even with internet brokerage rates as low as 0.3%. Add up the brokerage from your last tax return to see what we mean.

There's also an important, but less measurable, benefit to taking a longer-term approach. It makes you think long and hard about which stocks to include in your portfolio. When you are considering buying a stock for 10 years or more, you tend to pick quality businesses. And that can only be a good thing.

Hopefully, you are somewhat against this particular human folly. Most people, though, aren't so resistant.

Munger refers to a human condition known as 'incentive-caused bias' and it explains the functioning of media quite nicely. There's a widely held belief, and it may be correct, although declining newspaper circulations suggest otherwise, that emotional, confrontational, dramatic coverage sells more papers than rational, factual reporting. Hence the tendency to induce panic in investors when calmness would better serve their interests.

But incentive-caused bias doesn't just affect the media. Just look at how honest managing directors can first convince themselves, then their board, then their shareholders, how an offshore acquisition or hostile takeover will be great for everyone, especially themselves. Generous options packages offer a fitting explanation for many examples of corporate foolishness.

To lose money, avert your eyes from a factual assessment of a situation and bury yourself in the opinions and arguments of those with a vested interest in convincing you of the veracity of their own opinion.

3. Follow fads or 'hot stocks'

In his highly recommended book Influence: The Psychology of Persuasion , Robert Cialdini talks about another human condition known as 'social proof'. The evolution of the human species, and sheep, was greatly assisted by a tendency to follow the crowd-safety in numbers and all that.

Anyone who thinks that social proof is solely the preserve of the historian should study the mania of the dot com boom. Millions, gulled with the fear of standing apart from the crowd, played a huge role in firing the mania. Conformity still dictates many areas of life but following the stockmarket crowd can be a costly mistake. As Buffett says, 'you pay a very high price in the stockmarket for a cheery consensus.'

That's why we are most often excited when others are depressed and fearful when others are optimistic (see our review of FKP on page 6). And it explains why we're worried about China, nickel stocks and other areas like the spate of listed investment company floats that are currently running hot.

'Right decision, wrong result'. In an imperfect activity like investing, mistakes are absolutely inevitable. But, odd as it may sound, sometimes even when you're right, you're wrong.

To call tech stocks overvalued in mid-1999 was undoubtedly correct. But for the next six months, as speculators pushed prices higher still, it sure didn't feel correct. It's a fact of life that someone will always be getting rich a little quicker than you are. But then again, they may become poor just as quickly by adopting the same approach.

If you take the conservative decision not to invest in a stock, and it goes up anyway, don't fret. Just be patient-other opportunities are often just around the corner. But if you are interested in blowing your capital, now's a good time to capitulate and buy at these higher prices.

5. Buy cyclical stocks at the top

There is the natural human tendency to extrapolate recent events. So when a cyclical stock like a steel company or property developer has a few tough years, investors tend to make the assumption that the bad times will last indefinitely. This can sometimes offer good opportunities for the canny investor.

In the same way, when these stocks show a few years of good results, thanks, for example, to strong Chinese metal demand, a booming property market or some other factor, the market tends to extrapolate the good times. It's the same mistake made at different ends of the cycle. Just at the peak of a cycle, investors can confuse a cyclical stock with a growth stock and bid the shares up, perhaps to a very high PER. But when earnings are at a peak, that's exactly when cyclical stocks should be selling on a low PER. When earnings fall, as they inevitably do with a cyclical downturn, the shares come crashing down. Farmers-who are used to the feast/famine cycle of a life on the land-seem less susceptible to this folly than most.

6. Follow overly acquisitive management

In his comprehensive book, Two Centuries of Panic , Trevor Sykes says that 'more companies are ruined by bad management than by bad economies'. We'd most definitely agree. Overly acquisitive managements-those hell-bent on growth, seemingly at any cost, are especially prone to getting into trouble. How so?

Acquisitions often involve large amounts of debt which thereby increase risk.As interest rates rise, for example, a growing portion of cashflow has to be diverted to service debt rather than deployed in the business or paid out as dividends. Secondly, acquisitive managements, often suffering from delusions of grandeur, can overstretch themselves. And, finally, acquisitions tend to cloud the company's financial accounts. This can fool bankers and shareholders for a while but by the time the gravity of a tough situation comes to light, it's too late. The collapse of speedily built empires like Austrim, Quintex and Adelaide Steamship are stark reminders of what can go wrong. Backing such management is almost bound to help lighten your wallet.

7. Invest in rapidly expanding financial institutions

Depending on the riskiness of the borrower, a financial institution might make a 'spread' or 'margin' on loans of anything from 1% to 5% per year. But when a loan goes bad, it can lose 100%. It's a risk that must be managed very, very carefully. Warren Buffett once remarked that a bad bank manager can flush all your equity down the toilet in your lunch hour.

And watching the accounting ratios like a hawk won't always save you either. In banking, growth can actually be used to hide bad loans temporarily (as, perhaps, we are about to see). A bank that is experiencing a high rate of loan delinquencies can easily halve that rate temporarily by writing new loans and doubling the size of its loan book-after all, a new loan takes time before it can go bad. But hastily made new loans are likely to be of poorer quality than existing ones.

This is why we get worried when financial institutions aim for rapid growth. Bank of Queensland, on which we have a negative recommendation, has targeted a 5% share of the national home loan market in 3-5 years, compared to its current 2.5% share. To achieve that, we suspect it will have to offer lower rates, or take on riskier business, to wrestle market share from the other banks-especially as it tackles markets outside its home state. If you want to improve your chances of ending up in the financial poorhouse, put your money into fast-growing financial institutions.

8. Work to the 'greater fool' theory

Some investors seem happy to buy expensive stocks, knowing full well they're overvalued, because they feel confident that someone else will come along and pay an even higher price. That's what happened in the dot com boom and it's what seems to be happening in the current nickel boom. Many investors buying nickel stocks now believe them to be overvalued, but assume they'll get even more overpriced-as in the Poseidon boom of the early 1970s. It's financial musical chairs for suckers and is likely to end up costing many investors a bundle.

9. Buy 'gunna' companies rather than 'doer' companies

'Gunna' companies are those that are 'gunna' do this and 'gunna' do that. Such unproven companies, and their attendant management teams, are a great way to lose capital. But even well-established companies can be 'gunna' companies. Management will explain away the poor performance of the last few years and concentrate on what it will do in the future. Chances are it will be putting on a similar show a few years down the track. While those sticking with proven companies and managements should do well, if you're aiming to lose money, buy 'gunna' companies.

Wednesday, 25 September 2013

From 1977 through his retirement in 1990, Peter Lynch steered the Fidelity Magellan Fund to a total return of 2,510%, or five times the approximate 500% return of the Standard & Poor's 500 index. In his 1989 book One Up on Wall Street, Lynch described a variety of strategies that individual investors can use to duplicate his success. These strategies divide attractive stocks into different categories, each characterized by different criteria. Among those most easy to identify using quantitative research are fast growers, slow growers and stalwarts, with special criteria applied to cyclical and financial stocks. (The latter, for example, should have strong equity-to-assets ratios as a measure of financial solvency.)

Peter Lynch's Company Categories:

Fast Growers

These companies have little debt, are growing earnings at 20% to 50% a year, and have a stock price-to-earnings ratio below the company's earnings growth rate.

Investing in these types of stocks makes sense for investors who want to find solidly financed, fast-growing companies at reasonable prices.

Slow Growers

Here Lynch is looking for companies with high dividend payouts, since dividends are the main reason for investing in slow-growth companies.

Among other things, he also requires that such companies have sales in excess of $1 billion, sales that generally are growing faster than inventories, a low yield-adjusted price/earnings-to-growth ratio, and a reasonable debt-to-equity ratio.

Investing in these types of stocks makes sense for income-oriented investors.

Stalwarts

Stalwarts have only moderate earnings growth but hold the potential for 30%-to-50% stock price gains over a two-year period if they can be purchased at attractive prices.

Characteristics include positive earnings; a debt to equity ratio of .33 or less; sales rates that generally are increasing in line with, or ahead of, inventories; and a low yield-adjusted price/earnings-to-growth ratio.

Investing in these types of stocks makes sense for investors who aren't willing to pay up for high-growth companies but still want the chance to enjoy significant capital gains.

Published on 26 Jan 2013
John Reese discusses his guru-based investing system and outlines the strategies of Warren Buffett, based on the book "Buffettology", and Peter Lynch, which is based on the book "One Up on Wall Street". Reese also discusses the Validea investing framework and how investors can be utilize systematic strategies like the ones outlined in the presentation.

Reflect on his record for a second. Lynch ran Fidelity's Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That's a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.

Fortunately for us, he's willing to share his secrets. To achieve his stunning track record, he clung to eight simple principles. Here they are.

1. Know what you own
Seems elementary, right? But as someone who talks to lots of investors, I can report that you'd be shocked at how few investors actually do their research. Scroll down to No. 7 for a good first step in getting ahead of the game.

2. It's futile to predict the economy and interest rates (so don't waste time trying)
After 2008's crash, I noticed a distinct increase in armchair economists. We financial types do enjoy water cooler talk about interest rates, trade deficits, debt levels, etc. But there's a danger in converting thought into action.

The U.S. economy is an extraordinarily complex system, with 300 million people acting in their own self-interest and responding to each others' actions, government incentives, and external shocks. And that's before we factor in our increasingly frequent interactions with the rest of the world.

Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep at night.

3. You have plenty of time to identify and recognize exceptional companies
Lynch mentions that Wal-Mart (NYSE: WMT) was a 10-bagger -- i.e. its stock rose to 10 times its initial price -- 10 years after it went public. Even if you had gotten in after waiting a decade, though, you'd be sitting on a 100-bagger.

Some would argue that it's still not too late to get in on Wal-Mart, decades after going public. While the company's no longer a monster growth story, it continues to crank out 20% returns on equity year after year. That type of consistent ROE is a huge positive indicator of management's ability to effectively allocate capital.

I could tell a similar tale about Microsoft's early growth years, right on down to its still-impressive current return on equity (42%).

And Amazon.com (Nasdaq: AMZN) , though only 13 years old as a public company, has seen its stock double since its 10th birthday. Of these three, it's the only company still trading at growth-stock valuations. Bulls are hitching their wagon to Amazon.com's ability to expand its role as the premier online retailer, and its upside in the cloud-computing space.

The lesson of Wal-Mart, Microsoft, and Amazon.com? You don't need to immediately jump into the hot stock you just heard about. There's plenty of time to do your research first. See No. 1.

4. Avoid long shots
Lynch claims he was 0-for-25 in investing in companies that had no revenue but a great story. Remember, the guy who averaged 29% returns went oh-fer on long shots. You and I are unlikely to do much better.

I've said it before, and I'll say it again. Use companies with proven track records as your baseline.ExxonMobil (NYSE: XOM) , IBM (NYSE: IBM) , and Procter & Gamble(NYSE: PG) are selling for 9, 11, and 16 times forward earnings, respectively. This is what the market is charging for solid, low-to-moderate-growth companies that dominate (or at least co-dominate) their spaces. Expect to pay more for higher-growth prospects, but make sure the risk-reward trade-off on an unproven company is worth it.

5. Good management is very important; good businesses matter more
The pithier Lynchism is: "Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it."

For a prototypical example of a so-easy-a-caveman-could-run-it company, think the aforementioned Procter & Gamble.

6. Be flexible and humble, and learn from mistakes
Lynch has said: "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."

7. Before you make a purchase, you should be able to explain why you're buying
Specifically, you should be able to explain your thesis in three sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it's time to sell.

8. There's always something to worry about.
Lynch noted that investors made a killing in the 1950s despite the very new threat of nuclear war. There are plenty of fears to choose from right now, but we've survived a Great Depression, two world wars, an oil crisis, and double-digit inflation.

Always remember, if our worst fears come true, there'll be a heck of a lot more to worry about than some stock market losses. Lynch's parting shot is that investing is more about stomach than brains.

Peter's principles in action
So there you have it. These are the eight principles Peter Lynch used to bring the market to its knees. They seem simple, but trust me, sticking to them is harder than it sounds.

Tuesday, 24 September 2013

There are about 16,000 publicly owned companies in the U.S. for you to select from. There are also about 3 times this number (48,000) of publicly owned companies in the other countries for you to select from too.

With so many companies, of course, some are much better candidates for your consideration than others.

Of these companies, fewer than 2% are likely to make the cut so far as your quality standards are concerned.

And perhaps, only 5% of THOSE might be available at the right price at any given time- and even this could be an overestimate.

Illustration:

1000 stocks

Only 20 are quality stocks (20/1000 = 2%)

Of these 20 quality stocks, only 1is available at the right price at any given time, if at all. (1/20 = 5%)

1. Stocks in the market had enjoyed a great rise to a year high and optimism abounded.
2. In the festive atmosphere that surrounded a recent 300 points in three weeks, I was the most depressed person.
3. I am always more depressed by an overpriced market in which many stocks are hitting new highs every day than by a beaten-down market in a recession.
4. Recessions, I figure, will always end sooner or later.
5. In a beaten-down market there are bargains everywhere you look.
6. But in an overpriced market, it's hard to find anything worth buying.
7. The devoted stockpicker is happier when the market drops 300 points than when it rises the same amount.
8. Many of the larger stocks had risen in price to the point that they'd strayed far above their earning lines. This was a bad sign.
9. Stocks that are priced higher than their earnings lines have a regular habit of moving sideways (a.k.a. taking a breather) or falling in price until they are brought back to more reasonable valuations.
10. A glance at these charts led me to suspect that the much-ballyhooed growth stocks this year would do nothing or go sideways in the next year, even in a good market.
11. In a bad market, they could suffer 30% declines.
12. I was more worried about the growth stocks.
13. There's no quicker way to tell if a large growth stock is overvalued, undervalued, or fairly priced than by looking at a chart book.
14. Buy shares when the stock price is at or below the earnings line, and not when the price line diverges into the danger zone, way above the earnings line.
15. The market overall had also reached very pricey levels relative to book value, earnings and other common measures, but many of the smaller stocks had not.
16. Annual tax selling by disheartened investors at the end of the year drives the prices of smaller issues to pathetic lows.
17. You could make a nice living buying stocks from the low list in November and December during the tax-selling period and then holding them through January, when the prices always seem to rebound.
18. This January effect, is especially powerful with smaller companies., which over the last 60 years have risen 6.86% in price in that one month, while stocks in general have risen only 1.6%.
19. Don't pick a new and different company just to give yourself another quote to look up. You'll end up with too many stocks and you won't remember why you bought any of them.
20. Getting involved with a manageable number of companies and confining your buying and selling to these is not a bad strategy.
21. Once you have bought a stock, presumably you have learned something about the industry and the company's place within it, how it behaves in recessions, what factors affect the earnings, etc.
22. Inevitably, some gloomy scenario will cause a general retreat in the stock market, your old favourites will once again become bargains, and you can add to your investment.
23. The more common practice of buying, selling, and forgetting a long string of companies is not likely to succeed. Yet many investors continue to do this.
24. They want to put their old stocks out of their minds, because an old stock evokes a painful memory.
25. If they didn't lose money on it by selling too late, then they lost money on it by selling too soon. Either way, it's something to forget.
26. With a stock you once owned, especially one that's gone up since you sold it, it's human nature to avoid looking at the quote on the business page, the way you might sneak around the aisle to avoid meeting an old flame in a supermarket.
27. I know people who read the stock tables with their fingers over their eyes, to protect themselves from the emotional shock of seeing that their sold stock has doubled since they sold it.
28. People have to train themselves to overcome this phobia.
29. I am forced to get involved with stocks I have owned before, because otherwise there'd be nothing left to buy.
30. Along the way, I have also learned to think of investments not as disconnected events, but as continuing sagas, which need to be rechecked from time to time for new twists and turns in the plots.
31. Unless a company goes bankrupt, the story is never over.
32. A stock you might have owned 10 years ago, or 2 years ago, may be worth buying again.
33. To keep up with the old favourites, I carry a notebook, in which I record important details from the quarterly and annual reports, plus the reasons that I bought or sold each stock the last time around.
34. On the way to the office or at home late at night, I thumb through these notebooks, as other people thumb through love letters found in the attic.

Markets change and conditions change.
One style of manager or one kind of fund will not succeed in all seasons.
You just never know where the next great performances will be, so it pays to be eclectic.

Some problems to look out for:
1. Stuck in a situation where the managers have lost their touch.
2. The stocks in the fund have gone out of favour:

A value fund can be a wonderful performer for 3 years and awful for the next 6 years.

Growth funds lost their advantage in certain years and then led the markets in certain years.

1. Capital appreciation stocks: Buy any and all kinds of stocks that can give capital appreciation.

2. Value stocks: Invest in companies whose assets, not their current earnings, are the main attraction.

3. Quality growth stocks: Invest in medium-sized and large companies that are well established, expanding at a respectable and steady rate, and increasing their earnings 15% a year or better. [This cuts out the cyclicals, the slower-growing blue chips, and the utilities.]

4. Emerging growth stocks: Invest mostly in small companies.

5. Special situation stocks: Invest in stocks of companies that have nothing in particular in common except that something unique has occurred to change their prospects.

Value of an Asset

From The Essays of Warren Buffett: “In Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the lifetime of the asset.”

Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.

Always buy a lot when the price is low.

Never buy when the stock is overpriced.

It is alright to buy when the selected stock is at a fair price.

Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.

Do not time the market for such or any stocks.

By keeping to the above strategy, the returns will be delivered through the growth of the company's business.

So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.

The downside risk is protected through only buying when the price is low or fairly priced.

Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.

Sell urgently when the company business fundamental has deteriorated irreversibly.

You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.

In conclusion, a critical key to successful investing is in your stock picking ability.

My Philosophy and Strategy

DOCUMENTRY- WARREN BUFFETT THE WORLDS GREATEST MONEY MAKER

Peter Lynch

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.2. Never invest in any idea you can’t illustrate with a crayon.3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.5. Time is on your side when you own shares of superior companies.6. Owning stock is like having children. Don’t get involved with more than you can handle.7. When the insiders are buying, it’s a good sign.8. Unless you’re a short seller, it never pays to be pessimistic.9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Think of your physical, mental and social well-being. Money may not buy happiness.

What is Risk?

The major RISK facing you is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms. And the greatest enemy of reaching those goals is INFLATION. Nothing is safe from inflation. Short-term price volatility is NOT risk for investors who have time horizons 5, 10, 15 or 30 years away. Volatility is the friend of the long term investor. The most important friends of your investment goal are COMPOUNDING and TIME.

Life Cycle of A Successful Company

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:- fixed assets such as equipment, property, or industrial buildings- fixing problems with an asset- preparing an asset to be used in business- restoring property- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

The best stock investment strategy

Keep it simple. Keep it safe (make money with less risk taking). You don't need to pick the best stock or even the best stock funds to do well, if you have an investment strategy that keeps you out of trouble.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

Visualization Video for a New Life

All equity security investments present a risk of loss of capital

Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. The results of your investing will be affected by a number of factors, including the performance of the investment markets in which you invest.

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.• A balance sheet with less debt than other companies in its particular industry.• A P/E ratio no higher than average.• A dividend yield that suits your particular needs.• A below-average dividend pay-out ratio.• A history of earnings and dividends not pockmarked by erratic ups and downs.• Companies whose ROE is 15 or better.• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Benjamin Graham

"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."

Sell the losers, let the winners run.

Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments.If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

Market Fluctuations of Investor's Portfolio

Note carefully what Graham is saying here. It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33%("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.